Progressivity Implications of Public Health Insurance Funding in Canada

We adopt a standard distributional impact methodology, based on Atkinson's cost of inequality approach, to estimate the degree of implicit redistribution created through public funding of health insurance in Canada. The first stage of the exercise is to determine the public health insurance benefits received by families of various age and composition and to add these to measured after-tax incomes. In our base case, which uses the Atkinson Mean Logarithmic Deviation as inequality index, we find that accounting for public health insurance benefits implies a reduction in inequality equivalent to 2.4% of per capita income. We then model the implications of moving to a hypothetical fully privatized system while proportionately refunding to individuals the tax revenues saved in doing so. This would give rise to a further 2.4% equivalent per capita income reduction resulting from increased inequality in the distribution of after-tax income. Thus, for this scenario, moving from public financing of health insurance in Canada to a fully privatized system implies an overall increase in inequality equivalent to a loss of 4.8% of per capita income. This corresponds to an increase of about 25% in existing inequality. Not surprisingly, the impact of publicly financed health insurance in reducing inequality is strongest for the elderly.